On credit cycles and the origin of commercial panics [microform]

MASTER NEGATIVE #

COLUMBIA UNIVERSITY LIBRARIES
PRESERVATION DIVISION

BIBLIOGRAPHIC MICROFORM TARGET

ORIGINAL MATERIAL AS FILMED - EXISTING BIBLIOGRAPHIC RECORD

352

Z28

v^8

Mills,. John

On credit cycles and the origin of ooiranercial
panics, (read December 11th, 1867)
p [9-J-40 tab 0

From the Transactions of the Manchester statis-
tical society 1867

Vol. •< r»:T5f fs

RESTRICTIONS ON USE:

Reproductions may not be made mthout permission from Columbia University Libraries.

TECHNICAL MICROFORM DATA

FILM SIZE:

REDUCTION RATIO:

/O:/

IMAGE PLACEMENT: lA

ilB

DATE FILMED:

INITIALS:

/ I

TRACKING # :

:?o5 3 3

FILMED BY PRESERVATION RESOURCES, BETHLEHEM, PA.

i

BIBLIOGRAPHIC IRREGULARITIES

MAIN ENTRY: Manchester Statistical Society. (Manciiester^ EngJand^^

On credit cycies and the origin of. cornmerciai panics

Bibliographic Irregularities in the Original Document:

■ ■ ■ ill volumes and pages affected; include name of institution if filming borrowed text
Page(s) missing/not available:

Volume(s) missing/not available: —

Illegible and/or damaged page(s):_ —

_Page(s) or volume(s) misnumbered:

Bound out of sequence:

_Page(s) or volume(s) filmed from copy borrowed from

X unnumbered tables between p. [10]-[11]

Other:

Inserted material:

TRACKING#: MSH30537

MANCHESTER STATISTICAL SOCIETY

ON CREDIT CYCLES

AND THE

ORIGIN OF COMMERCIAL PANICS

Br John Mills

[Read December 11th, 1867.]

CONTENTS

Introductory, on Method — Search for Inductions—Mr. Langton’a
“Waves” — Periodicity of Panic — No Corresponding Regularities in General
Trade Conditions — Nor in immediate Antecedents — Regularity discovered
in Changes following Crisis — Results from their succession — Growth of
Credit through Normal Cycles — Mental Origin —What is Credit?- and how
does Panic affect it? — First, or Post Panic Period — Its Features and
Development — Accidental Modifications — Middle, or Revival Period —
Influence of New Firms — Increment of Capital — Third, or Speculative
Period — Further Change of Mental Mood— Morbid Stage of Credit— Results
of Excessive Inflation — On General Prices — On Railway Stocks — Summary
of Subdivisions in Normal Cycle — Conclusions therefrom— Illustrations by
Diagram.

Composite action of above Law, with Law of Demand and Supply of
Capital — Equilibrium of Credit and Capital— Corrective force of Price of
Loans — Illustrations in 1852-3, and 1H60-1 — Effect of proposed “Free
Issues”— Loss of corrective force in morbid stage of Credit— Sources of
supply of Capital cut off— Effect of “ Free Issues” at this stage— The Three
Suspensions during Panic— True cause of Relief thereby afforded — Remedial
tendency of Economic Training — Moral Cause, Moral Remedy — Appeal to
Manchester.

SYNOPSIS OF SIX COMMEIICIAL PANICS IN THE PRESENT CENTURY

Date. Monetary Systxim of Period. Channel of previous Speculation, &c. Special Features of Crisis. | Special Effects.

1815-6. Inconvertible Pap('r cur -'cncy, Immense issues of paper fostered gen- 240 Country Banks failed. Great de- Destruction of Country Bank pajier
under Bank Restriction Act eral speculation. Creation of a struction of credit. caused paper currency to rise almost

great number of Country Banks. to par. and prepared the way for

resumption Act of 1819.

1825. Free Note issues, convertible South American Mining, and general Bullion raluced in Dec. to £1,260,000. When foreign exchanges became fa-
on demand, under Peel's speculation. Overissues by Country 70 Country Banks failed. Best Gov- vorable, Bank of England began to

Act, 1819. Banks, in face of outward drain. eminent securities inconvertible advance on a large scale, and so

into money. restored confidence.

1896-9. Ditto ditto ditto Foreign Loans. Railway speculations. Double, or split Crisis. Bullion in Crisis led to Committee of 1840, and

Joint Stock Banks estab- Inflation of credit, through the new Nov., 1836, £3,840,000. Two bad Bank Act, 1844.

lished. J. S. Banks. From 1836 to 39, great harvests, 1838-9, led to foreign drain.

Corn speculations. Bank neglected to raise rate. Bullion

in Sept., 1839, £2,406,000.

1847, Regulated issues and special Grain and Railway speculations. Bullion in Banking deparement re- Bank Act suspended, but only £400,000
metallic reserve, under duced by foreign drain to £2,588, issu^, and this not required. No

Bank Charter Act of 1844. 000, but no run for gold. Bank infringement.

notes in full credit. Consols almost
unsaleable.

1857. Ditto ditto ditto Speculation and over xdvances in Failure of Scotch and Liverpool Banks. Bank Act again suspended. Actual

Gla.sgow and Liverpool, Vast Am- Bullion in Banking department, issues beyond limit £928,000.

erican trade at time of American 11th Nov., £1,462,153.

panic.

1866. Ditto ditto ditto Joint Stock Companies, under Limited Failure of Banks, Discount Com- Bank Act suspended for third time.

Liability Act, 1862. Speculations panics, Financial Companies, and No excess over limit. Rate lO per

in Cotton in falling Market. Over Speculative trailers. Banking re- cent, continued for three months,

advances by Discount Companies on serve reduced to £850,000, English credit tainted abroad, for-

Contractors’ Bills, and Ships, &c. eigners having mistaken meaning

ni-

4

MANCHESTER STATISTICAL SOCIETY.

On Credit Cycles and the Origin of Commercial

Panics.

By John Miils.

[Read December 11th, 1867.]

iJt is scarcely a matter for surprise, and still less for regret, that
every commercial crisis occurring in this country is promptly
followed by a literature of pamphlets, discussing the phenomena
and their supposed causes, while they are yet matters of painful
interest to the public mind. In these disquisitions, to much that
is serviceable in the way of local and professional evidence, there
is usually added an abundance of wholesome homily as to the
future, combined in some cases with emphatic appeals on behalf of
inventions for the improvement of our system of paper currency.
One feature these productions have in common : they deal with
proximate causes only, or with mere a itecedents as causes ; each
crisis appearing to be the result of its own separate accident, —
usually some event lying on the surface of commercial history.
The highest attempt at generalisation does not ascend
beyond the fact — unquestionable in itself — that over-trading, in
some form or other, is the common forerunner of Panic. Over-
trading, however, is not an ultimate fact, and its regular recur-
rence claims explanation quite as importunately as the tragic events
which follow it.

12

Can wo got beyond this primitive method of dealing with u pro-
blem so momentous? Does the nature of the case permit the
application to it of the method by which modem science biings
physical and even social phenomena within the region of causation
and law ? Do any, and what uniformities of sequence emerge from
the mass of circumstances, firm and continuous enough to be made
the basis of generalisations by which we may ascend to a point
commanding the relation of all these events one to another?

A first glance into the matter does not inspire much hope of
success ill sujh an enterprise. Against a back ground of infinitely
diverse particulars — of elements in perpetual flux, and blown about
bjr ever varying currents of tendency, there appear, it is true, some
events occurring in serial order; but on examination, the most
exact and obvious of these serve only to explain themselves, gi’vdng '
no furtherance whatever to an enquiry into the wider and more
disastrous fluctuations in question. I do not remember to have
anywhere seen the results of observation in this direction more
clearly described than in a paper read before this Society by its
present president, Mr. Langton, in December 1857^ illustrated by a
diagram, (showing the fluctuation? of the currency over a consider-
able period^ on a plan which was afterwards expanded in the
larger charts published by Professor Jevons ; and I have a natural
pleasure in reading to you|^e following extract from that pape^
— now, unfortunately, out of print.

The first thing which will be noted on inspection of this chart, is the
quirl;erly fluctaation, exhibiting an almost invariable increase in the
demand of the public upon the Bank, from the second week in each quarter
up to the first week in the following one. This is accounted for by the
gradual absorption of the means of the public through the collection of
revenue, and the release of these funds by the payment of the dividends.

This short and superficial wave is accompanied by another, not so easily
detected (because sometimes absorbed in a larger movement) and more
difficult to account for. It has an annual increment and collapse, and is
doubtless connected with the action of the seasons upon trade. In the
midst of other disturbances this wave may be traced in the magnitude of
the operations of the third and loru’th quarters, and the almost invariable

>

f

. ON CEEDIT CYCLES, AND THE OEIGIN OF COMMERCIAL PANICS.

13

lull in the second quarter of the year ; the tliird quarter being generally
marked by rapid increase in the demand for accommodation at the Bank.
The culminating point of the movement originating in the third quarter of
the year, appears to be a moment favorable to the bursting of those
periodical storms, in which the commercial difficulties of the country find
their crisis.

“ These disturbances are the accompaniment of another wave, which
appears to have a decennial period, and in the generation of which, moral
causes have no doubt an important share.”

The first two of the uniformities here specified clearly resolve
themselves into those common and calculable displacements of
Capital which result from the settlement of a due claim, — the
same in kind as the payment of a bill or debt at maturity. They
are simply transactions, or congeries of such, linked in regularity
with certain dates of the calendar, with the break-up of ice in
northern seas, or with the ingathering of the world’s harvests,
but they tell us nothing of the occult forces which swell or
diminish the volume of transactions through a procession of years.
They are indeed “ waves,” as distinguished from the current
or the tide.

But the third kind of disturbances referred to by Mr. Langton
is very different. Occurring with almost the same exact regularity
as the fluctuations just noticed, there is nothing in calendars or
seasons to give at once the signal and solution to these. So far as
we can see, they are yoked to nothing in the steady sequences
of the material world. We have here, therefore, facts of a new
order, dictating the search for cause at a deeper level. And if
this circumstance increases the difficult)’’, it also enhances the
interest of the enquiry. The subject of commercial fluctuation
will acquire a new dignity if it be found striking its roots far
below the level of its physical particulars, and proving itself
cognate with the sciences of mind.

The first and most suggestive feature of these events, then, is
the striking uniformity in the periods of their occurrence. Since
Mr, Langton’s paper was written, another decade has passed,

H ME. JOHN MILLS,

and brought with it one more Panic to strengthen the induction
at which he hinted.* It is an unquestionable fact that about
every ten years there occurs a vast and sudden increase of demand
in the loan market, followed by a great re\ ulsion and a temporary
destruction of credit. In the present century six of these events
have been distinctly marked. In 1815-6, 240 country banks
failed; in 1825, 70 banks shared the same fate; in 1836-9 a
similar revulsion took place, but was divided into two shocks,
probably by peculiarities of the harvests in that decade ; and of
what occurred in 1847, 1857, and 1866 I scarcely need remind
you, as those years will be fresh in the memories of most of those
who hear me.f

Now, with this portentous list before us, two conclusions
present themselves, craving a little emphasis at the veiy outset.
One is, that whatever we may at present think of its cause,
of its practical importance, or of its probable continuance, the
periodicity of commercial crisis is at any rate a fact. The
other is, that the instances are already too numerous, regular, and
persistent, to allow any foothold for a theory of fortuitous coin-
cidence. There is no region of scientific enquiry in which the
idea of so distinct and prolonged a series occurring ly accident
would not at once be scouted.

This first great line of uniformity hfiving then established
itself, we naturally survey the general conditions under which
commerce has been carried on during the present century, with
a view to discover some corresponding and corroborative order
of things. But in this direction the generalising instinct is
entireh baffled. The conditions of trade and currency during

* M. Coquelin, writing in 1848, spoke of the recurrence of Panics as
" presqtte periodique." The two decades following brought their punctual
contributions to the series, and the limiting adverb may surely now be
suppressed. — Revue des Deux Mondes, 1st Nov., 1848.

t See Synopsis of Commercial Panics in England during the present
century. (Page fi.'

ox CREDIT CYCLES, AXD THE OEIGIX OF COMMERCIAL PANICS. 15

i

the last six decades exhibit no uniformity whatever During
that period the import and export trades of the country have
enormously increased in volume, and greatly varied in their
tributary channels. There has been a regime of inconvertible
paper currency, a regime of free issues of convertible paper
currency, and finally a regime of regulated issues upon a metallic
basis. The laws of banking and mercantile association have
been modified in every conceivable way. During the same period
commerce has been revolutionised by the transition from monopoly
to free trade; and the material basis of the currencies of the
world has received a vast and sudden addition by the discoveries
of the Californian mines in 1848, and those of Australia in 1851.

And if, turning from these general conditions, we inspect the
immediate antecedents, or so-called causes of Panics, we find in them
an equally bewildering diversity. In a subordinate sense certain
mere accidents may indeed have assigned to them the dignity of
causes; as when we say, for instance, that the collapse of the
great railway speculation led to the Panic of 1847 ; and that
losses in the American trade brought on the crisis of 1857. But
it is evident that these incidental causes do not account for the
feature we hav’c noted as common to the whole series, that of
regularity of occurrence. Other evmnts, equally grave in character,
have occurred in the intervals, producing a ceitain pertuibation,
which passed, however, without culminating in Panic. There was, for
instance, the Russian war, which gave to English commerce some
anxious moments. An event still more tremendous in its bearings
on trade, the collapse of the Southern Confederaev in 1861, could
1 only develope at the time a semi-, or pseudo-Panic, followed by

some restoration of confidence,— the real periocUcal revulsion
» occurring in 1866, only one year in advance of the usual decennial

period; a small deflection from the ordinary course ot things,
showing how little the action of the normal causes of Panic could
be accelerated by so vast an addition of external force.

We entirely fail, therefore, to trace, either in the general

16

HR. JOHX HILLS,

commercial conditions of the whole period which is the area of 1

research, or amongst the incidents which precipitated the six

great crises omhraced within it, any succession of things so similar

in their nature and their order of occurrence, as to coi respond

with the uniformity of those events. The former do not group -

themselves in any apparent relation to the latter ; and we can no

more infer the ixistence of such relation than we could suppose ^

the tidal movements of seas to correspond with the action of

submarine volcanoes, or with the chance transit of vessels, though

they were as huge as the Great Eastern. This remark is specially

applicable to the popular scape-goat of cuirency legislation, of

whose clianges the grim genius of Punic seems to take no

cognisance whatever. The successive acts afifecting tbe medium of

4

exchange in the present century have been already specified ; and

when we add that revulsions have occurred equally under systems

of metalli: currency, debased or pure, and under the widest

diffusion of paper money, with or without the attribute of legal

tender, it seems futile to look for any guiding symptom of i

correspondence in this direction. This need not imply a doubt of

the fact that modes of currency adjustment have a powerful

influence in aggravating or mitigating the evils of the crisis when

developed, and that such modes should therefore be carefully

studied and cautiously applied ; but the lesson of facts up to this

period is, surely, that the elements which develope commercial

crises are too deep and subtle to be conjured out of existence by

any legislative manipulation of currencies.

Obtaining, then, only these negative results from the plan of
questioning general antecedents, we may now try the effect of
inverting the process, and, following the ordei' of the phenomena,
enquire into the nature of the changes they indicate or produce,
still with a view to detect the existence of any corresponding
successional order of things. By patient use of this method I
think we shall meet with evidence leading us up to the further
generalisations, that the decades interposed between the great com-

k. L

os CREDII CYCLES; .4.ND THE ORIGIN OF COMMERCIAL PANICS. 17

mercial crises are normal cycles of developement of Credit under
certain existing conditions; that during each of those decades
commercial Credit runs through the mutations of a life, having its
infancy, growth to maturity, diseased over-growth, and death by
collapse ; and that each cycle is composed of well-marked normal
stages, corresponding to these ideas in nature and succession. And
as Credit is a thing of moral essence, the external character of
each stage of its devolopement is traced to a parallel change of
mental mood, and we find the whole subject embraced under the
wider generalisation of a normal tendency of the human mind.
To this tendency — that is, the tendeneg of the faculty of credit to
gyQK- — may be attributed the evolution of stages in a uniform
order, each having a distinct phenomenal character; and, opeiating
as it does, under the existing conditions of an island nation, with
vast accumulated wealth, of energetic temperament and a low
average of economical training, the same tendency is determined to
the completion of its cycle of developement within ordinary periods
of ten years. This particular division of time we accept, of course,
as a simple fact of observation. The number of years might have
been five, or fifteen, or twenty ; and I have no more mission to
account for its not being so than the astronomer has to account for
the time occupied by the diurnal and annual revolutions of the
earth. The one important matter is the successional order, as first
suggested by the fact of periodicity ; and that order is important
chiefly as a guide to parallel inductions, forming a gradus by which
we may arrive at a true theory of cause.

In the course of our investigation, then, we shall probably find
that the malady of commercial crisis is not, in essence, a matter of
the purse but of the mind^ And regret it as we may, it seems as if,
for the present, these rapid mercantile mutations were as inevitable
as the periodical tempests which clear the atmo.sphere of tropical

regions.

^JPollowing the course of any one of these decennial cycles we
shall observe that, mutatis mutandis^ — due allowance made for

18

3IR. JOHN MILLS,

incidental disturbances from wars, exceptional harvests, &c.-^each
stage is, in the main, like the same stages in other cycles.

After the violence of a crisis has subsided, it becomes clear that
it is not upon Capital, nor even upon legitimate commerce that
the blow has fallen heaviest. As a rule. Panics do not destroy
Capital ; they merely reveal the extent to which it has been
previously destroyed by its betrayal into hopelessly unproductive
works. Capital productively fixed, Capital engaged in manufacture
and trade, continues to fractify, though, for the time, only to that
minimum extent of production and distribution, below which the
current necessities of the world prevent it from falling. But
there is a change. Something has passed away, and left an appalling
blank behind it. It is that subtle, and, within certain limits,
most useful agency by which inert and jealous Capital is mobilised
and tempted forward into new channels of enterprise. That agency
is Credit.

Now, in defining this important element in the subject of Panics
it is essential that nothing be misunderstood, and I am therefore
compelled for a moment to deal with more rudimentary matters
than I like before this Society. There is a sense in which Credit
— even commercial Credit — never dies : if it did we should be
reduced to the primitive stage of production and barter, limited to
the personal wants of each individual. In this sense the value of
some things which appear to have intrinsic value of the most solid and
immutable kind, depends really upon Credit. I have a piece of
gold in my pocket ; but its value is not in my pocket : it is in your
minds and the minds of the whole human race. The intrinsic
value of a sovereign to myself personally is so small as to be
practically nil ; it is greatly less than that of the loaf which can
be bought with a fortieth fraction of it. But the sovereign passes
from my hands, and through the hands of a thousand other persons,
by vurtuc of a mental association with universal acceptance at a
certain high rate in exchange. That belief, credo, or Credit is its
value : but the mental process is so instant and absolute that wo

ON CREDIT CYCLES, AND THE ORIGIN OF COMMERCIAL P.VNICS. 19

habitually regard the value as intrinsic ; and for all practical
purposes it may be so designated. There are other subjects of this
Credit or belief, in regard to which the mental process is less
instant and absolute, but which carry with them so much of the
association of certainty as protects them from the ordinary influence
of Panic. Within these • limits Credit has a perennial vitality in
the individual assurance of universal recognition. But beyond
these limits there is an outlying mass of engagements, chiefly in a
documentary fonn, acknowledgments of debt, with or without
specified time of redemption— the substance of which is for the
time invisible — and the redemption of which is a matter of more
or less certainty, more or less doubt. It is amongst these that
Credit, in its ordinary sense, partaking somewhat of the nature of
faith in things unseen, has its perfect work ; and it is in relation
to these that Credit experiences the decennial changes to which I

referred.

Broadly defined, then, Panic is the destruction, in the mind, of a
bundle of beliefs. As a first result of that destruction, a mass of
paper documents, the outward expressions of those beliefs from
which they derived their circulating force, becomes a mere dead
residuum, lea'sdng a void which can only be filled by other agents
possessing that vital grasp on belief which they- have lost. And the
void imisthQ filled. The volume of transactions and engagements
cannot immediately be reduced. But Panic, the most rigorous of
realists, rejects the dead symbols of Credit, and exacts Capital in
the mohlU form of currency. Suum cuique is now the universal rule,
and everybody reclaims his own. The usual magazines of Capital
in that form are rapidly drained, and the rate of its hire is
proportionately raised. The Panic period is therefore maiked by
great scarcity of mobile Capital ; because, though not less in
quantity than before, it is drafted off into a thousand unusual
channels to perform the functions commonly exercised by Credit.

. L

20

-MR. JOHN MILLS,

The first following stage, which we may call

The Post-Panic Period,

is marked by an exactly opposite condition — that of plethora. By
which I mean, not merely an absolute increase in the stock of
bullion and in private deposits with the Bank. Though the
increase in that sense is real, the plethora is much more obvious in
the sense of the relation between supply and demand. An increase
of a few millions in the resources of the Bank would not be so
much felt if it did net happen that, concurrently with such increase,
there is a great falling off in the aggregate of obligations tendered
for discount that is, in the demand for loans. The plethora is
produced then :

1st. As a secondary consequence of the new mental mood of the
lending classes, the owners of loanable Capital. The first con-
sequence of that mood was, as we have seen, excessive scarcity ;
because, in the supreme moment of the crisis, the grasp of each
capitalist closed tight upon his own means, and the Banks rushed
to strengthen their reserves against possible emergencies. But
when that moment has passed, and its first terror has subsided, the
private capitalist no longer feels the instinct of self-preservation,
demanding absolute personal possession of his means, and the
Banks are relieved from the necessity of enormous resources in their
own tills. The Capital thus released from durance, does not at
once flow back into the channels of loan and discount, from which
it had so suddenly been withdrawn. Like the uneasy swell of the
sea after the turbulence of recent tempest, there is a remainder of
distrust, quieter but more enduring, and this dictates a much more
rigid selection of securities, and concentrates the deposit of loanable
Capital upon a few important centres. Gold and notes flow back
into the Bank, either directly, or through the deposited reserves of
other Banks, causing a great accumulation of unused resources in
the chief financial depot, the Bank of England.

The prevailing mental mood, as affecting the harrowing
classes, is equally efficient in inducing plethora. In such times it
is as dangerous to borrow as to lend, and the inducement to borrow

ON CREDIT CYCLES, AND THE ORIGIN OT COMMERCIAL PANICS. 21

is greatly diminished. If an expansion of Credit has a tendency to
raise prices and profits (as shown by Mr. Mill in the 1 2th chapter
of his “ Political Economy”) the collapse of Credit has a tendency
to depress both, and much more rapidly. The legitimate trader
who employs, in addition to his own means, a proportion of
borrowed Capital, under pledge of his Credit in the form of bills
based on his transactions, has found, in the moment of crisis, the
conjuring power of his name utterly vanished, and has been
compelled to provide for inexorably maturing obligations by the
forced sale of goods or produce at such prices as would tempt
forth reluctant Capital. But he who sells thus, does not buy.
Credit has become a curse, and he will deal in it as little as
possible. As the effect of a wide experience of this kind on the
part of the borrowing classes, the volume of transactions which
arc effected by the aid of bills and discounts is largely reduced.
This particular cause, however, of plethora, might prove but a
transient one, if the effects of the crisis upon profits were transient.
Other things being equal, borrowers, tempted by a low rate of
interest, would sooner recover from Panic than lenders.^ But other
things arc not equal. The effects of commer ual Panic gradually
percolate through all classes. Economy, enforced on great numbers
of people by losses from failures and from depredated investments,
restricts their purchasing power; and a diminished wages-fund
does the same thing in relation to the working classes. Profits are
kept down to the stunted proportions of demand ; purchase and
production are carried on, as we say, “ from hand to mouth ; ” and
merchants are reduced to doing what they significantly call “ a
retail trade.” The accumulation of unusi d Capital, therefoie,
receives no check from an increased, or even an ordinary, creation
of pledgeable securities to compete for loans.

These two processes may be considered the chief internal causes
of the plethora of unused Capital which marks the Post-Panic
period. There is, however an external process, co-operating very
powerfully towards the same result. It is,

MK. JuH.N .M1U>,

oi-d. Ihe movemeut of the foreign oxohaugus, consequent on
the collapse of Credit. We have seen that the expansion of Credit
tended to raise prices and profits. But as regards our foreign trade,
there is a natural limitation and corrective of too rapid a progress
in that respect. When prices in England lise to, or beyond the
level of prices in other countries, foreigners, seeking of course the
cheapest market, restrict or cease their purchases here ; the area of
our markets is diminished, and the exchanges become adverse to
this country. The exact contrary of this takes place when prices
are suddenly and greatly reduced by the destruction of Credit. In
the absence of any other disturbing force, the tendency of such an
event is to encourage foreigners to buy from us, and to turn the
exchanges in our favour. The diminution of imports caused by
the concurrent inability or unwillingness of the English merchant
to buy, contributes to the same end. The exchanges being thus
turned in our favour, the tide of money-Capital flows towards this
country, and helps to swell the abundance already resulting from
the internal causes before specified.

Under these influences the post-Panic period assumes a marked
character which I venture to call normal, because, through an
experience of a number of such periods, we observe an identity of
feature in the great accumulation of unused Capital and the ruling
of an excessively low rate of interest ; and a concurrent identity of
mental mood in the revulsion from habitual beliefs It is of
importance to carry with us this idea of the normalism of the
successive phases, — because accidental modifications frequently
occur which may distract attention from the main lines of the case,
and seduce us into a search for remedies where they cannot be found.
The present period, for instanee‘^^with a general resemblance to the
corresponding periods before-named, has shown some peculiar
features resulting from exceptional circumstances. The internal
causes of plethora, following the mental changes of the lending
and borrowing classes, have acted as they always did and ever will
do, but there was considerable d ' ty in the a'- ‘ion of the external

UX CKEDIX CVCLES, AM) lilK UltlOlX OF COMMtllClAL FA.N'ICS. 2d

influence upon the foreign exchanges. The mistaken interpretation
put by foreigners upon Lord Clarendon’s celebrated circular ; the
unusually long retention by the Bank directors of the Panic rate
of discount ; the existence of a prohibitory tariff in America ; and,
above all, the universal certainty that cotton, the largest staple
of English manufacture, and the most influential upon the course of
general prices, was following a downward career, and would drag
with it commodities in general ; all these things for a time
stemmed the tide of custom which would otherwise naturally
have flowed to our shores. English Credit was comi)romised
abroad, and foreigners dared not buy it; English commodities
could only be sold retail while still lower prices were
looming in the future. Foreign exchange, therefore, refused to
turn in our favor, and we saw the anomaly of 10 per cent, and
3 per cent, divided by only twenty miles of sea. This deviation
from the usual course of events in the post-Panic period does not
weaken the doctrine of moral causes. The destruction of bcueis
extended on this occasion beyond our shores, and determined
the flow of Capital into other channels than that of commerce with
England, by a simple expansion of the process occurring at home.

But when the internal causes of plethora began to create
sjTuptoms of returning ease, belief in England began to be re-form-
ed, English Credit was again in the market, the exchanges were
reversed, foreign Capital flowed in and accelerated the fall of our
rate of interest to the level of other countries.

The post-Panic period, thus marked by plethora of unused
Capital and dormancy of enterprise, has commonly extended over
two or three of the first years of these decennial cycles of CrediU
The quai’terly and annual variations in the Bank’s resources
proceed with their usual regularity ; but the average resers'e is one
of steady abundance, and the rate of interest almost uniformly
low. ^0 doubt a new confidence begins to germinate early in this
period, but its growth is slow^ The old race of traders have still
a vivid remembrance of a “ black Fi’iday ” or some other day of

24

UK. JOHN IIIILS,

equally sombre hue. Time alone can steady the shattered nerves, and
form a heal thy cicatrice over wounds so deep. And that process suffers
rude interruptions. Houses which — survivnig the fii’st shock — were
rendered too weak to endure through a long period of dormancy
and doubt, occasionally succumb, and so renew unpleasant sensa-
tions, and impede the nascent growth of Credit, f^n the main,
however, there is progress. Speculation having long ceased to
forestall the markets, the actual wants of the world begin to
emphasise demand, and so to tell upon prices. New and young
firms begin to be formed, with no drag of deterrent experience
upon their movements, and anxious to he “ doing business.”
Even old firms, though less eager and more wary, are wushful to
utilise the costly apparatus they are compelled to keep up, and to
fill the gaps in their Capital oy new gains. If, while matters
stand thus, any .specially favorable incident should happen, as for
instance, the clearing from the horizon of political disquiet, we
find ourselves fairly in what we may call

The Middle ok Eevival Period. ^

Dui’ing this period trade may be, and usually is, subject to
considerable mutations, from such causes as a bad harvest, like that
of 1853, or the Russian War, in 1854, or the American Civil War,
in 1861 ; and the supply of loanable capital may vary, the rate
usually ranging from 4 to 7 per cent. ; but even [while subject to
these disturbances. Credit, in the main, continues to grow more
robust, enterprise to increase, and profits to enlarge. In fact, and
notwithstanding all drawbacks, this ma}^ bo considered the healthiest
period of our commercial life, and that in which accumulations
from real — as distinguished from merely nominal profits — attain
their highest developemcnt. During the last decade this process
was singularly rapid, the exports having already attained their
maximum in 1860; and nothing can more clearly show the full-
blooded, obstinate vitality of Credit during these middle periods
than the fact that in the succeeding year, (1861) which saw the

ON CREDIT Ci'CLES, AND THE ORIGIN OF COMMERCIAL PANICS. 25

4

I

?

1^

outbreak of the great American convulsion, the exports only fell off
between 1 and 2 per cent., and even in the following year (1862)
only about 8 per cent.

It is in these periods that new commercial and manufacturing
concerns mostly spring into existence, tempted by the high ratio of
current pi’ofits. We have no means of estimating, as I should
wish, the annual accession to the ranks of competition at this or
any other period. It has been stated that the penonnel of the
militaiy service is changed in an average period of 12 years ; but
assuming a much less rapid rate of changes in the commercial
world, fit is clear that before the sixth or seventh year of the decade,
and after two or three years of lucrative trade, there must be a
large per centage of new men, to whom the grim stroy of past
panics, and of the nemesis of over-speculation, is a mere myth, or
at most a matter of hear-say tradition. We know the tendency of
the human mind to take from present conditions the hues of a
forecasted future ; and not less certain is the unfortunate fact that
the existing system of culture amongst our commercial classes is
but little adapted to correct the want of personal experience. It is
the student who watches for movements and changes ; the great
majority of men habitually assume that what is is what will he,
and it is under the influence of this idea that a healthy growth
gradually merges into dangerous inflation. ConcuiTently with this
state of matters, the actual increment of Capital from profits begins
to overflow the usual channels of investment ; and in seeking foi
new channels, the hahit of contemplating a high scale of profits
makes men look over old-fashioned modes of investment to others

which promise better things.

From these combined causes the middle period, marked bj
revived trade and sound credit, changes into what may well be

called

Tue Speculative Period.

To avoid misapprehension it is needful here to explain the sense

in which this phrase is used. If the Dictionary meaning of the

c

A

t

26 :klK. JOHxV MILLS,

word Speculation be adopted : i. e. “ tlie act or practice of buying
stocks, or goods, &c., in the expectation of a rise of price, and of
selling them at an advance,”^ we find that the dividing line
between speculation and ordinary trading is very obscure, — that, in
fact, no act of commerce is entirely free from the speculative
element, and that speculation is more or less at work through every
period of the Credit-cycle. It is also true that speculation is in
many cases a very useful agent in equalising the distribution of
commodities, and supplying the urgent wants of communities, and
is, therefore, by no means worthy of the unqualified censure some-
times awarded to it. Tlie whole question is one of degree and of
conditions — of degree relatively to conditions. That is to say, an
amount of speculative trading which at one period would bo
moderate and healthy, would at another period be excessive and
dangerous.

And I cannot but think that the main condition in determining
this difference is the state of Credit for the time being. We have
traced the progress of that element through two periods of its
growth, and have noted its action in raising prices and profits. We
noted also that speculation was carried to a trifiing extent in the
first period, and only to a moderate extent in the second ; but, if it
were supposable that speculation could have been indefinitely
extended in those periods, a large extension would have been much
less likely to prove excessive and hurtful then, than it would in the
third period, because at that time Credit, and with it price, was
broadly based upon a mass of unengaged Capital, and there was less
danger of the sudden and ruinous fall of prices which always accom-
panies a collapse of Credit. There was, in fact, a healthy equipoise
between the two. Unfortunately, however, in the absence of
adequate foresight and self-control, the tendency is for speculation to
attain its most rapid growth exactly when its growth is most
dangerous; that is, when Credit has become inflated out of pro-
portion to the reserves of loanable Capital. And after this

** Webster.

ox CBEDIT CYCLES, AXD IHE OEIGIX OF COMMEECI.AL PAXICS. 27

inflation has commenced. Credit and speculation act upon each other
as reciprocal stimulants. Inflated Credit, by elevating prices and
profits, tempts to further speculation ; and speculation can only be
carried on by multiplying instruments of Credit.

And what is it, then, that really underlies this new condition of
things ? It is a further change in the mental mood of traders.
Medical men tell us of some forms of physical disease which are
the result of a gradual exaggeration of healthy functional action, the
transition from the healthy to the morbid state being made without
any distinct demarcation between the two. The social mind is
subject to similar changes. There is a morbid excess of belief, an
hypertrophy of belief, induced by an excess of nourishment to that
faculty of the mind. In the speculative period under review, the
healthy confidence which marked the middle period has degenerated
into the disease of a too facile faith. The one fact of an apparent
profit is for the mument held as full warrant for ever new com-
mitments. And this is not confined to the commercial classes.
The investing class of non-traders easily takes the infection. And,
as demand always stimulates supply, there is at such times no lack
of channels for the inflow of this confidence; every one of them, of
course, a Pactolus. The admirable modern invention of Joint
Stock Companies has an almost infinite absorbent capacity ; and
the crowd of morbid-minded investors in financial and industrial
enterprises, of various degrees of merit, do not, in their excited
mood, think of the pertinent questions, whether their capital will
become quickly productive, and whether their commitment is out of
proportion to their means. The commercial and investing classes
thus come under an enormous amount of obligation, dependent foi
its success upon the one precarious condition of a continuance of
the existing scale of prices. Two things now usually occur :

1st.— There is a line beyond which prices cannot be pushed by
any extension of Credit, without breaking down the purchasing
power of the world’s markets. Side by side, if not pari passu, with
mercantile enterprise here, foreign competition has been progressing*

n

28 Mil. JOHJT MILLS,

Speculation, growing more and more reckless, has thrown goods
upon the markets faster than they can be absorbed, producing an
oppressive glut, beneath which prices must inevitably give way.

With the first symptoms of such a result, renewals of Credit
become more difficult, and sales of goods more imperative. Prices
consequently recede further, and then further ; and the downward
impulse being once given, it does not cease until the fall is out of
all proportion to the previous gradual ris^ In two months of 1857,
the average fall thns produced was over 30 per cent. ; and if the
phenomena Avere not so startlingly distinct in the middle of
1866, it was because the previous abnonnal position of our greatest
staple trade had to some extent discounted the process.

2nd — When prices begin to waver, the strain which commercial
Credit preAnously bore, is thrown, not merely upon the reserves of
loanable Capital, but upon those usually stable forms of Credit
which are representative of public works, such as railways. These
securities are always largely pledged, and the institutions holding
them are at such times driven to realise at current values in
exchange. This crucial test throws a new light upon the dangerous
rapidity with which Capital has been fixed in these Avorks, and
reveals hoAV far even Credit is committed to further works of
postponed productiveness.*^ At a critical period such securities
become practically useless — almost as if this great portion of the
resources of the country had been sunk in the surrounding sea. I
am inclined to think such a discovery one of the worst propogators

* The aggregate of railway investment on the 1st July last -was upAvards
of 400 milions, the greater portion of which has been tainted with discredit.

Even the sinister speed of suspicion, however, cannot permeate so vast a mass

as this during the usually brief stage of acute Panic. But as the first access of

doubt is more than justified by the investigations to which it leads, the post-

Panic period is now-a-days characterised by a chronic state of break-down 1

in Railway Credit. The graphic account given by Mr. NeAvmarch (vol. 5)

of the Railway <fiscredit in 1849, which AV'as said to have entailed a loss of

180 millions sterling during one month only, exhibits a remarkable parallel

to the events of 1867.

ON CKEDIT CYCLES, AND THE OEIOIN OF COMMERCIAL PANICS. 29

of Panic, — only less fatal, indeed, than would be a doubt of the
conA^’ortibility of the Bank note. It is as if an army, Avhile
struggling with the enemy, should learn that its lines of leticat

were in peril.

jOf the natural sequel to these things, the failure of great banks,
discount companies, and mercantile firms, I say nothing. They
are the symptoms incident to the disease, not the disease itself.
Nor is there much scientific interest in the circumstance that these
revulsions usually occur in the Autumnal quarter,— a nile not
without exception, as we saw in 1866. From causes well
ascertained, there is in that quarter always an increase in the
demand for ready money | and when Credit is aheady in its
critical stage of inflation, this extra stress finds out the peccant
link in the chain whose strength is the strength of its weakest
part^ Possibly also the season of gloom and decadence may have
a certain predisposing tendency. Men’s cretfos are scarcely so
Augorous in the proverbial month of suicides as they are in the

youth of the year.

Through the normal cycle of credit we have now worked our
way again to a point corresponding to that where I stated that
Panic was “the destruction of a bundle of beliefs.” The road we
haA’e traversed was found clearly enough divided into three stages :

1. The Post-panic period, marked by plethora of reserve

Capital, and dormancy of speculation.

2. The Middle, or Revival period, marked by increasing trade,

moderate speculation, and a sound state of Credit.

3. The Speculative period, showing inflation of Credit, high
range of prices, unproductive inA'estment, and excessive commit-
ments ; and leading to Crisis and the end of the cycle.

With each of these stages there appears to be a concun’cnt
change in the mental mood of the trading public; and these
changes are the same in each decade, and follow the same relative
order. Commencing Avith the series of decennial crises, wo have
here three inductions, mutually corroboratiA’e, and leading to a

i

30

I

i

t

I

i

MR. JOHX MILLS,

fourth and final generalisation, in the fact of a mental law which
embraces and subordinates them all. Credit, then, we know to be
a thing of growth through normal and predicable phases; and,
under existing conditions, it is deciduous at intervals of about
ten years. This conclusion is only a more formal statement of
the “moral causes” which Mr. Langtou conjectured as under-
l}ung his “decennial tides.”

(jThe phenomenal results of the influences thus sketched will be
found clearly illustrated in the Diagram, (pagi3-8) for which I am
indebted to the kindness of my friend Professor Jevons, and which
is intended to show, after elimination of the effects of accidental
disturbance, the main lines of tendency through a type-cycle of
Ci’edit, so far as they are ascertainable from existing materials. It
should be clearly understood as designed to exhibit only the

general character” of such a cycle of fluctuation. The three stages
into which I have divided the inter-critical decade, though uniform
in their order of succession, do, in fact, vary in length, and slide
into each other so gradually, that the dark vertical lines which
intersect the cur^^es sifter the third and sixth yc'ars must be taken
only as approximate demarcations.

The features of the Post -panic period are thrown into strong
relief by the rapidly ascending curves of “Bullion” and “Bank-
ing reserves,” contrasted with the steep descent of the lines
“Inland Bills,” “Bills in Bank,” “Prices,” and “Rate of
Discount.” An inverse, but more gradual movement, is shown in
the lines traversing the middle, or active period. The story of the
third, or speculative period, is well told in the progressively
sharpening downward curve of the lines of “Bullion” and “Reserve,”
and the general but unvaried movement of the lines of “ Inland
Bills,” “Bills in Bank,” “Prices,” “Railway Expenditure,” “Bank-
ruptcy,” and “Rate of Discount.” The two lines showing “Savings
of the Working Classes,” and “ Pauperism,” are noticeable both in
their relation to each other, (that of almost exact inversion) and to
the general lines of tendency throughout tho cycle. The com-

(

1

ox CKEDIT CYCLES, AND THE OHIOIX OF COMMERCIAL PANICS. 31

paratively tame deflections of “Bank” and “ Countiy Note
Circulation” illustrate the steady and subordinate part played by the
Bank note where there is an economising machinery of clearance,
and where the note itself is issued only under conditions of absolute
guarantee ; and the contrast between their character and that of the
bold curves which track the decadence and developement of pure
Credit, (bullion and reserve in one direction, and bills, prices, and
rate of discount in the other) gives emphatic support to my position
as to the chief factor in commercial fluctuations. .'IChe slight and brief
lift in the line of “Bank Circulation” within the groove of
“ Collapse,” will be recognised as resulting from the issues follow-
ing tho temporary suspensions of the Bank Act.

Thus far the subject of Commercial Credit has been trcated
mainly as if its developement in a given course were the result of a
single uncompounded law ; and this has been purposely done, with
a view to bring my chief position into clearer relief than would
have been possible, if the argument had been encumbered with
references to modifying causes. The growth of Credit ?s, how-
ever, constantly modified by the economic law of demand and
supplj’, acting, through price, as between Credit and Capital, and
tending to preserve the necessary equilibrium between them. I say
“ the necessary equilibrium” because, in fact. Credit cannot long
exist without it. Belief is founded upon evidence, and must be
kept in contact with it. Commercial Credit, is based upon Capital,
and the basis must be kept sufllcieutly broad for tho proportions of
the superstructure. Descending to detail, we know that a bill of
exchange, the concrete form of Commercial Credit, is nothing apait
from the belief that at a specific date it will become actual Capital ;
and the encashment of such bill, under discount, is merely a sale of
that belief at a cash price. Subtract the belief from it and you
may as well put the bill in the fire. It rests upon Capital, and upon
Capital only. And what is true of the detail is true of the mass.
The ratio of the growth of Credit prescribes the ratio of the demand
for Capital, and, therefore, the rate of its hire. This brings in the

32

I

I

i

f

r

MR. Jonx MILLS,

adjusting element of price. Credit, •with its normal tendency to
growth, can only grow under the stringent condition of paying a
discount proportioned to the degree in which its growth outruns
the supply of loan Capital. Experience and theory alike pronounce
this necessity to he absolute. Here, therefore, "we are confronted with
a new force, modifying the action of the primary force which impels
Credit through its normal cycle. We have, in fact, one of those
cases to which the axiom of Mr. Mill is applicable, — “The joint
effect of causes is the sum of their separate effects, and we can
no more omit consideration of the influence of the economic law of
demand and supply on the developement of Credit, than the
astronomer coixld leave out the tangential or centripetal tendency
from his account of the planetary orbits.

The economic law of Price, always benefleent in its action, is in no
case more so then when it operates at the fountain head of mercantile
resources. On the one hand its attractive; force upon Capital
replenishes the reserves needful to sustain Credit, when the
competition for loans has increased : on the other, by bearing
more or less heavily on the sensitive surface of Profit, it applies an
effective break to the dangerous velocity with which a too facile
Credit would multiply transactions. In both ways it tends to
preserve that natural and (to a country like this, which, besides
trading so closely up to its own means, is a centre for the financial
operations of the world) that vitally important equipoise between
the growth of bill-making Credit, and the supply of Capital from
accumulated profits and sa-rings. This it actually effects so long
as the faculty of Credit is undiseased. We have seen something,
and shall presently see more, of the reasons why it is not always
so effectual.

In following the course of the developement of Credit, some
allusion was made to incidental disturbances which, for a time,
seemed to mask the operation of the law of its growth. AVhen,
however, we regard that law and the economic law of price in

System of Logic, Yol. 1., Cap vi.

ON CEEniT CYCLES, AND THE OEIGIN OP C0M5IEECIAL PANICS.

33

their mutually modifying action, many of these apparent episodes
fall into the general course of progression, and the line of inductive
proof becomes more continuous. The Post-Panio period, being
one of comparatively slight fluctuation, does not afford many
‘illustrative instances, but we may cite two striking incidental
exaggerations of Credit, and consequent demand for Capital, which
occurred respectively about the commencement of the middle
periods of the last two cycles. Putting an exceptional strain upon
the corrective action of the economic law of price, and being quite
different in their origins, these cases are the more valuable as
proving a fortiori the case in respect of ordinary fluctuations.
The first arose in 1852-3, when the great gold discoveries bogan to
swell bullion reserves, to elevate the prices of commodities,
and so to stimulate enterprise, just recovering from the dormant
period extending from the collapse of 1847. Miith this new
momentum added to its normal rate of growth. Credit was soon
developed to great proportions, and was still further enlarged by
an active import trade in wheat, which rose in price through the
whole of 1853, attaining a maximum of 80s. lOd. per quarter m
February, 1854. The creation of bills increased from an aggregate
of £62,700,000 in the second quarter of 1852, to £88,140,000 in
the third quarter of 1853; and the bullion reserves dwindling
from a maximum of £21,880,000, to a minimum of £12,000,000,
the rate of discount was raised by steps from 2 to 5^ per cent.,
when the needful supplies flowed in, and trade was carried on with
ease and security. One indication of the rapidity and extent to
which Capital responded to the call of Credit in this case, is the
fact that, in 1853, £12,600,000 of Bullion was brought to the
Mint, and passed into the circulation of the country.

The second instance had a very different origin. In 1860-1,
first the anticipation, and then the reality of the American civil
war caused a great and rapid rise in the price of cotton, and gave
the first start to the prices of other fibres and of general commodities,
after the dormant period which followed the crisis of 1857. Great

I

34 MR. JOHN MILLS,

speculative activity led to the creation of bills to an extent which
pressed heavily on the reserve of bullion. Owing to this pressure
the hire of loans rose from 4 to 8 per cent., and the needful
supplies being then attracted, the rate fell, in 1862, to 24 percent.
During 1861 and 1862 the enormous aggregate of 17 millions of.
buUion was coined at the Mint. It is further remarkable that in
this case the corrective process was not even attended with any
corresponding fall in general prices, the ratio of current profits
being so high that trade was able to boar tlie increased cost of
loans without retreating from the existing level of price.

These cases are cited as distinctly exemplifying the process of
adjustment which is constantly, if not always obviously, being
carried out, so long as the two correlative laws, of growth of Credit,
and demand and supply of Capital, are in free and healthy action.
Having neither wish nor space to launch into (currency polemics, I
may yet remark, in passing, that, from our present point of ^’iew,
we discover little inducement to disturb the harmonious action of
these natural forces by any such artificial appliance as that which
meets with favour in many quarters, of answering the demand
which is essentially a demand for Capital, by an extended issue of
“ promises to pay.” The doctrine of equipoise between Credit and
Capital — founded as it is upon the mental law of the dependence of
belief upon fact — is a doctrine of perfect freedo/n, with the one sole
condition of perfect honesty. To adulterate v ith the clement of
Credit that circulating Capital which finally settles the transactions
embodied for a time in the floating forms of Credit, is neither free
trade nor fair trade ; while it is fatal to the balance of tendencies,
on which the well-being of all trade is poised. To the extent that
currency based upon Credit displaces curiTeney based upon its own
reserve of A'isible Capital, it either neutralises the economic law of
demand, or, reversing the poles of the magnet, it exerts a repellant
instead of an attractive influence on foreign sujtplies.

As the cycle enters its third, or speculative stage, we find that tliere
is no need of any such artificial additions to the elements of danger.

ox CRRDIT CYCLES, AXP TIIE ORIGIN OP COMMERCIAL PANICS. 3o

In this country Credit shows such natural vigour of growth, and it
grows under such stimulating conditions, that any weighting of that
side of the scale is quite out of the question. The time comes too soon
when our two laws, while they continue to be correlative, tend to
become less and less coefficient. The adjusting principle is still at
work, but under the influences now gathering, it becomes by
degrees overborne, and at last overwhelmed. The Credit end of the
beam is too far depressed to be raised again until lightened of its load
by a violent process. As this, however, is owing to the relative
default of Capital, it is clear that no amount of paper promises,
now placed in the opposite scale, would redress the balance.

But how has this relative default of Capital arisen ? How is it
that the economic law of demand and supply has itself ceased to
redress the balance? Simply because enterprise has at length
thrown itself into courses which cut us off from all the reservoirs
of supply on which that law could act, and has hitherto acted, for
our benefit. Banking reserves, the loan-fund on which current
Credit is based, are replenished from domestic and foreign sources.
The savings and floating balances of our people arc di'awn more
largely into those reserves by an increased rate of interest. Other
countries are laid under tribute, partly and mainly through the
medium of ourforeign commerce, which brings some returns inbullion,
and partly by direct foreign investment in the purchase of English
bills. In highly speculative periods large drafts are made upon the
reserves so procured, for permanent investment abroad, as in
Government loans, or banking and industrial enterprises ; and still
larger amounts are fixed in works of postponed productri cness at
home. Now, it is not merely that the immense sums thus expended
are taken from the common loan-fund on which Credit depends;
a vast amount of labour is diverted from the production of the
commodities which we should otherwise export to adjust the pay-
ment for our imports, and establish a balance in our favour. In the
meantime the extent of our commitments, and their probable effect
upon Credit, are not unknown to foreigners, who become proportion-

36 ME. JOHN MILLS,

ately chary of buying English bills. In this way the domestic
and foreign sources of the supply of loan Capital are simultane-
ously cut off; elevation of the rate of discount ceases to produce
its accustomed effects ; and nothing remains but for the inverted
pyramid of Credit to fall by its own weight.

It appears, therefore, that at a period of diseased overgrowth of
Credit, the economic law of demand acting upon the price of loan-
Capital, — though it still exerts some corrective influence, and at
any rate acts as a storm- warning, like the hoisting of a Fitzroy
drum, — does not, for the reasons just assigned, succeed in maintain-
ing the etjuipoise which is our only guarantee against disaster.

Having already referred to the mischievous effect which would
follow the common proposal of extended issues of currency at a
time when normal influences were fully capable of controUing all
fluctuations, we may well consider what would be the results of
such a policy when Credit has reached its dangerous state of
devolopement.

If you could not at that earlier and healthier period sustain the
edifice of Credit upon a mere Credit curi’ency, how are you to do
so now ? It is exactly the relative excess of promises over the
power of performance that is the most salient symptom of the
disease ; a proposal to add more promises to the number is not a very
hopeful application of the doctrine similid similihis curantur.
You may say that these notes are convertible into gold on demand;
but your hypothetical gold basis may be already rapidly diminish-
ing under the action of adverse foreign exchanges. You cannot
induce foreigners to accept your promises in payment, and if you
obtain for these a domestic circulation, by that means keeping up
the volume of Credit and the high range of juices, you simply set
free and displace a proportionate amount of the gold which alone is
effective in discharging our balances. And then when the postponed
but inevitable revulsion arrives, you have merely succeeded in
adding to aU other critical phenomena the currency Panic from
which we have been happily free since 1844. This is not a matter

ON CBEDIl etCLES, AND THE OEIGIN OE COMMERCIAL PANICS, o7

of theory alone. The experiment has been amply tried. During
the great foreign speculations which led to the crisis of 1825, the
Bank of England, conscious of danger, reduced her issues some
2^ millions in 1824; but the private and joint stock Banks in
the same period expanded their issues about 4^ millions, and 70
of these Banks were swept out of existence for their zeal in thus
providing “ an elastic currency.” In the three years that preceded
the crisis of 1836-9 exactly the same process was carried out, and
with exactly similar results. On reference to the Diagram (p. 8)
it will be observed that even under the present regulated system,
the line indicating the amount of “Country circulation” maintains its
upward direction long after the line of “Bank circulation” has
taken a downward curve; showing, (1.) that an adverse foreign
exchange acts primarily on the central reserve, which is our most
sensitive Credit meter— and (2.) that the desired “ free issues ”
would merely strengthen the influences which baffle the corrective
action of economic law, and would pro tanto exaggerate the evils
of a crisis already inevitable.

It is true that at three successive decennial periods, the worst
features of Panic have been mitigated by a permission to issue bank
notes which had no claim to be considered as transferable gold
warrants. It must be remembered, however, that when Panic has
once supervened, the nature of the problem is entirely changed.
My conclusions have been founded on the composite action of the
mental law of growth of Credit and the eccnomic law of demand
and supply. But at the period of crisis Credit has no growth— it
is for the moment suspended. If one factor has ceased to exist,
you cannot work out the problem with the other. The crisis had
really commenced when, as we saw, the drawing power of price
upon Capital was overborne by the diseased activity of Credit, and
when the stimulus of a further addition to it would merely have
aggravated the coming disaster : but in this latter stage a stage
of suspended animation — a stimulus is the very thing required.
The galvanism applied to a paralysed limb, and the air pumped

38

MK. JOHN MILLS,

into the lungs of a drowned man, arc neither of them vital forces,
acting under an organic law : hut they may prove excellent
artificial appliances to cases of exceptional and urgent need.

But the success of this departure from sound economic principle,
itself testifies to the value of that principle in its normal working.
A small issue of notes in excess of the gold basis — nay, the very
knowledge of their becoming accessible — acts like magic upon the
chaos of general doubt and confusion ; and the expressions of
wonder which always greet this display of cosmical energy would
be in no degree misplaced if the energy resided in a modicum of
paper currency as such. It really resides, however, in the mental
association which Bank of England notes have already acquired
with the absolute security derived from their ordinai’y basis of gold.
The known common condition of their issue constitutes them
Capital ; and the mental effects they produce as Capital are
fortunately continued even in the momentar}- interval when they
cease to be such. Could any more striking proof be given that a
currency which is Capital is the most natural basis for Credit in
ordinary times ?

I am now perhaps fairly open to the query, “Is there no remedy
for Commercial Panics ? Is it a fatal necessity that Credit must
grow rank and rotten, and collapse in a spasm of terror ? Must
we at the end of every ten years resign ourselves to a ruinous
convulsion, as to some mysterious decree of Providence ?” I can
only answer that, though not looking forward to any trade
millenium, blest with entire immunity from disaster, it may be
fairly hoped that the cycles of Credit can be indefinitely lengthened,
and the evils which mark their close greatly mitigated. The
philosophy of this matter recognises as little of Fate as it does of
Chance. But the first step must be to remove the question from
the realm of mystery to that of knowledge. "We can grapple with
what we know. And as we have found moral causes lying at the
root of these changes, it is to moral means in the main that we
must look for controlling them. My prescription, therefore, is but

OS' CRKDIX CYCLES, AXD TUE OlilGIX OE COMMERCIAL TAXICS. 39

the old-fashioned one of Education, — the special Education of our
trading classes in those scientific truths, bearing on the creation
and distribution of wealth, the ultimate lesson of which is embodied
in many a shrewd old aphorism which wc are equally apt to quote
in words and-to neglect in practice.' The commercial department
of education is at present mainly a matter of “the three B’s,”
with an addendum of Book-keeping. I fear our middle-class
schools do not much concern themselves with the principles which
underlie the phenomena of Exchange, of Credit, and of Capital,
nor with that appeal to moral sanctions in connection with these,
which should strengthen the mind against a blind energy of tem-
perament and a hasty instinct of gain. Educate, indeed, as we
may. Credit will always fulfil its own law of growth ; and as you
cannot endow all men with caution and conscience, the growth will
still tend, at intervals to degenerate into a critical rankness ; but it
is very sure that, to the extent in which you increase the average
intelligence, and elevate the average moral tone, you co-operate
with the conservative action of economic law on the equilibrium of
Credit and Capital. It is the liability to an ignorant speculative
excitement, and a willingness to take immoral risks, which ulti-
mately put the growth of Credit beyond the control of the price of
loan Capital. Diminish those, and the cycle may then expand
beyond its customary decade.

To some, who have been accustomed to denounce the sinistef
action of a class of freebooters and wreckers in the financial world
as the true cause of Panics, the idea of forces essentially inde-
pendent of such action, and following a course normal of develope-
ment. Will be specially unwelcome. But, while I should be sorry
in any degree to weaken the sentiment of just indignation which
is being every where expressed against conduct that has blackened
the commercial annals of the last few years, I venture to think
there would be small gain in deliberately ignoring, on that account^
any evidence we can obtain as to influences that are actii e on the
great scale in preparing a suitable field for the exercise of such un-

scrupulous cunning and rapacity. For it must not be forgotten that
the tendencies whose order of progression has been sketched,
operate upon the broad aggi’egatc of the commercial and investing
community, — not upon the exceptional Macheaths and Turpins who
infest its ranks, and whose predatory instincts know no orderly
succession of phases, but are unchangeably vicious and vigilant.
A parallel reflection applies to the suggested remedy. Ameliorate
the general mental conditions of commerce, and you proportionately
limit the sphere and powers of designing knaves. In any case,
commercial ethics, which are clear and immutable, dealing only
with conduct, can put no bar to the scientific process which seeks
only the explanation of facts.

To others it may appear a fanatical doctrine that the schoolmaster,
rather than the legislator, is the magician who is to steady our
rates of discount, and save Lombard street from its decennial fits of
ten-or. But why is this to be thought more fanatical than the
proposal to relegate our working classes to the same agency, when
they fall into mischievous economical heresies, or when their
standard of workmanship drops below that of their continental
brethren ?

So far as these northern districts are concerned, the Cobden chair
of Political Economy at Owens College, at present so ably filled,
might become a centre from which should radiate the remedial
influences which I ventui'o to suggest. In matters of monetaiy
science I believe Manchester to be sounder than most other Com-
mercial communities; and that very fact imposes upon her the
obligation to employ her great resources in diffusing the special
kind of culture required to diminish the disasters we are met to
discuss.

3> o ^ 2i

MR. JOHN Mins,